Financial Market

Oil this week traded at the $100 barrel barrier for the first time on Wednesday, marking an important market milestone.

Spurred on by recent unrest in Nigeria, Algeria and Pakistan, coupled with a weakening US dollar and cold weather warnings, the record high price of oil is wake up call of things to come in the New Year.

On Wednesday it was light sweet crude rose $4.02 to $100 a barrel in New York, prompting a drop in shares and a surge in gold prices.

On the back of the price rises the UK saw record petrol prices at the pumps at an average high of 103.3p, beating the previous high of 102.92p set on Boxing Day.

After Wednesdays $100 high, oil prices did ease today dipping to 99.61 dollars per barrel.

The oil high comes at a time when many central banks are trying to cut interest rates in order to stimulate growth, and with this new high there are increasing concerns that rising oil prices will stoke inflation. Increased inflation brought about by increasing oil prices will result in central banks being unable to make the necessary rate cuts to boost flagging economies, bringing the threat of recession closer.

Market experts have said that continuing demand for oil without an increased supply will only see this price increase further adding to the woes of oil producing economies.

The oil-producers’ cartel OPEC has blamed speculators for the high price of crude, stating that there is plenty of the fuel in the market to meet the demand of consumers.

Oil traders are due to meet OPEC in Vienna on February 1st, but after rejecting proposals for any increase in production in December blaming rising oil prices on industry speculators, any rise in production looks an unlikely solution.

Although unrest in oil producing countries is certainly playing a significant role in the rising cost of oil, some market analysts have also identified increasing demand from China and India as a significant factor.

Oil prices however also continue to get support from a weakening dollar, and additional fears remain ahead of the US Department of Energy’s weekly report on energy stockpiles due today. If the report confirms a seventh consecutive weekly fall in crude oil reserves, oil prices could well break Wednesdays $100 per barrel high.

Last week ending December 21, the US Department of Energy reported crude oil fell 3.3 million to 293.6 million barrels of reserve crude oil, a sixth consecutive fall.

Over the past five years crude prices have quadrupled, and after staving of the $100 per barrel mark in 2007, experts are already predicting a $120 per barrel high in 2008 and news of further falling stock piles later toady will certainly send prices closer to this figure.

The price of gold passed a 28 year high of 850 dollars an ounce today following unrest in Pakistan and political turmoil in Kenya fuelled demand for the precious metal.

The current price of gold which hit $866.53 on the London Bullion Market, which although in part been contributed towards by the declining dollar which fell against the Euro again today, is as a result of demand brought on by safe haven buying.

The relationship between political unrest and an increased interest in gold is nothing new, and in troubled times gold is often seen as a safe haven for protecting investment funds from the impacts of inflation seen with stock and share investments.

Historically gold has not seen the rises of in 2007 (up 30%) since 1979, when the Iranian revolution crippled crude oil exports and US inflation hit 13%.

The rises in gold have come as record oil prices have been gradually driving up inflation, and supplies from South Africa, the world’s biggest producer, have dropped to the lowest in 84 years.

The demand for the metal has also has arisen due to heavy losses in credit markets which have spurred demand for alternatives to stocks and bonds. With the dollars drop investor interest in dollar-priced commodities is growing as they become cheaper for buyers using stronger currencies.

“Investors are worried about the oil prices and the weak dollar. When the situation is unstable, they invest their money elsewhere and this has boosted buying interest in gold” - Gary Yue, a gold dealer at Delta Asia Financial Group.

Also a factor in the rise of the price of gold, according to the World Gold Council, is the increased volume of jewellery purchases in emerging economic powerhouses China and India.

Gold is tipped to continue to increase in value over the coming months. Amongst the aforementioned reasons for the precious metals popularity, it believed many investors will continue to look at gold as a way of protecting reserve funds from acceleration inflation.